China and Global Financial Governance

The Rebalance author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into the U.S. rebalance to Asia. This conversation with Dr. Alicia Garcia-Herrero – Senior Fellow at Bruegel and a non-resident research fellow at Real Instituto El Cano; Chief Economist for the Asia Pacific at NATIXIS; adjunct professor at City University of Hong Kong and Hong Kong University of Science and Technology (HKUST) and visiting faculty at China-Europe International Business School (CEIBS) – is the 68th in “The Rebalance Insight Series.”

Assess China’s leadership role in global financial governance.

China’s leadership in global finance is only increasing over time and is bound to increase further after Trump’s victory [in the U.S. presidential election]. The strategy is twofold: fight for a more relevant role in existing institutions and create a parallel web of institutions and bilateral relations which will allow China to operate outside the global financial order. The best example of the former is China’s quest for the RMB entry into the SDR [special drawing rights] basket, becoming one of the five reserve currencies in the world. The best example of the latter is the creation of two new regional development banks, namely the AIIB [Asian Infrastructure Investment Bank] and the New Development Bank.

Despite its official status as a special drawing rights (SDR) currency, the Chinese yuan faces challenges in becoming an international reserve currency. What is the symbolism versus substance of this transition from perception to reality?

There is a large amount of symbolism (even propaganda) and less substance, at least for the time being. This is due to the fact that China is experiencing massive capital outflows and the RMB is depreciating, which obviously does not augur well in terms of the RMB’s attractiveness for international investors. If we add to this the fact that interest rates are increasingly low and that controls on capital outflows are tightening, this is certainly not the best time for the RMB to become a reserve currency.

The reality, however, is that being part of the SDR basket is close to an irrevocable decision, which means that, at some point in time, when China’s economic and financial conditions improve, the RMB should profit from its international currency status.

China’s recent billion-dollar bids to takeover European companies such as Swiss agribusiness Sygenta and German semiconductor company Aixtron have faced EU resistance. Explain the dichotomy of weighing national security concerns with attracting Chinese outbound investment.

EU countries have long been the most open to foreign direct investment from abroad. Not only has Europe received massive amounts of FDI for decades but, also, very few deals have been stopped due to security concerns. This is true for many Chinese deals in the past. In fact, the Chinese seem to have developed a preference for European corporations, as compared to the U.S., let alone Korean or Japanese, probably due to that reason.

EU countries seem to be starting to realize that, if other countries are more closed, they will be become the main target of China’s thirst to move up the ladder. This is where we stand now.

What does the near-failure of the EU-Canada Comprehensive Economic Trade Agreement (CETA) portend for future trade deals between the EU and China?

It simply means that the EU, as is probably the case for the U.S. – especially after Trump’s victory – is becoming more concerned about the impact of trade deals on income distribution. This becomes especially complicated in an economic bloc composed of 28 countries.

Explain whether or not U.S. President-elect Trump should be concerned about China’s role in reshaping the global financial order.

Trump should be very concerned about China’s push to change the global financial order because this is a zero-sum game. If China reshapes the world order, the U.S. will be the main loser.